Johnson and Johnson 2010 Annual Report Download - page 36

34 JOHNSON & JOHNSON 2010 ANNUAL REPORT
net selling prices in the Pharmaceutical business due to U.S. health
care reform and price reductions in certain Medical Devices and
Diagnostics businesses. The 2009 decrease of 6.9% as compared
to $16.9 billion in 2008 was primarily related to lower sales, the
negative impact of product mix, lower interest income due to lower
rates of interest earned and restructuring charges of $1.2 billion.
This was partially offset by lower selling, marketing and administra-
tive expenses due to cost containment efforts across all the busi-
nesses. The 2008 earnings included purchased in-process research
and development (IPR&D) charges of $0.2 billion and increased
investment spending in selling, marketing and administrative
expenses utilized from the proceeds associated with the divestiture
of the Professional Wound Care business of Ethicon, Inc. As a per-
cent to sales, consolidated earnings before provision for taxes on
income in 2010 was 27.5% versus 25.4% in 2009.
The sections that follow highlight the significant components
of the changes in consolidated earnings before provision for taxes
on income.
Cost of Products Sold and Selling, Marketing and Administrative
Expenses: Cost of products sold and selling, marketing and adminis-
trative expenses as a percent to sales were as follows:
% of Sales 2010 2009 2008
Cost of products sold 30.5% 29.8 29.1
Percent point increase over the prior year 0.7 0.7 —
Selling, marketing and administrative expenses 31.5 32.0 33.7
Percent point (decrease)/increase over the
prior year (0.5) (1.7) 0.2
In 2010, cost of products sold as a percent to sales increased com-
pared to the prior year primarily due to costs associated with the
impact of the OTC recall and remediation efforts in the Consumer
business, lower net selling prices in the Pharmaceutical business
due to U.S. health care reform and price reductions in certain
Medical Devices and Diagnostics businesses. Additionally,
unfavorable product mix attributable to the loss of market exclusiv-
ity for TOPAMAX® contributed to the increase. There was a
decrease in the percent to sales of selling, marketing and adminis-
trative expenses in 2010 compared to the prior year primarily due to
cost containment initiatives principally resulting from the restruc-
turing plan implemented in 2009. The decrease was partially offset
by lower net selling prices in the Pharmaceutical business due to
U.S. health care reform and price reductions in certain Medical
Devices and Diagnostics businesses.
In 2009, cost of products sold as a percent to sales increased
compared to the prior year primarily due to the continued negative
impact of product mix and inventory write-offs associated with
the restructuring activity. Additionally, 2008 included some non-
recurring positive items. There was a decrease in the percent to
sales of selling, marketing and administrative expenses in 2009
compared to the prior year primarily due to cost containment efforts
across all the businesses and the annualized savings recognized
from the 2007 restructuring program. In addition, in 2008 the
Company utilized the proceeds associated with the divestiture of
the Professional Wound Care business of Ethicon, Inc. to fund
increased investment spending.
In 2008, cost of products sold as a percent to sales remained
flat to the prior year. The change in the mix of businesses, with
higher sales growth in the Consumer business and a slight sales
decline in the Pharmaceutical business, had a negative impact on
the cost of products sold as a percent to sales. In 2008, this was off-
set by manufacturing efficiencies and non-recurring positive items
in 2008 and negative items in 2007. There was an increase in the
percent to sales of selling, marketing and administrative expenses in
2008 primarily due to the change in the mix of businesses, whereby
a greater proportion of sales were attributable to the Consumer seg-
ment, which has higher selling, marketing and administrative spend-
ing. Additionally, in 2008 the Company utilized the gain associated
with the divestiture of the Professional Wound Care business of
Ethicon, Inc. to fund increased investment spending. This was par-
tially offset by ongoing cost containment efforts.
Research and Development expense (excluding purchased in-process research and development charges) by segment of business was
as follows:
2010 2009 2008
_ _ ___________________ _____________________ _____________________
(Dollars in Millions) Amount % of Sales* Amount % of Sales* Amount % of Sales*
Consumer $609 4.2% 632 4.0 624 3.9
Pharmaceutical 4,432 19.8 4,591 20.4 5,095 20.7
Medical Devices and Diagnostics 1,803 7.3 1,763 7.5 1,858 8.0
Total research and development expense $6,844 11.1% 6,986 11.3 7,577 11.9
Percent (decrease)/increase over the prior year (2.0)% (7.8) (1.3)
* As a percent to segment sales
Research and Development Expense: Research and development
activities represent a significant part of the Company’s business.
These expenditures relate to the development of new products,
improvement of existing products, technical support of products
and compliance with governmental regulations for the protection
of consumers and patients. The Company remains committed to
investing in research and development with the aim of delivering
high quality and innovative products.
Restructuring: In 2009, the Company announced global restructur-
ing initiatives that are expected to generate pre-tax, annual cost
savings of approximately $1.5 billion when fully implemented in
2011. The associated savings has provided additional resources to
invest in new growth platforms; ensure the successful launch of the
Company’s many new products and continued growth of the core
businesses; and provide flexibility to adjust to the changed and
evolving global environment. In the fiscal fourth quarter of 2009,
the Company recorded a pre-tax charge of $1.2 billion, of which
$113 million was included in cost of products sold.
See Note 22 to the Consolidated Financial Statements for
additional details related to the restructuring.
Purchased In-Process Research and Development:Beginning in
2009, in accordance with U.S. GAAP for business combinations, pur-
chased in-process research and development (IPR&D) is no longer
expensed but capitalized and tested for impairment. The Company
capitalized approximately $0.2 billion of IPR&D in 2010, primarily
associated with the acquisitions of Acclarent, Inc., RespiVert Ltd. and
Micrus Endovascular Corporation. The Company capitalized $1.7 bil-
lion of IPR&D in 2009, primarily associated with the acquisitions of
Cougar Biotechnology, Inc. and substantially all of the assets and
rights of Elan related to its Alzheimer’s Immunotherapy Program.